Monday, May 03, 2010

As I wrote a couple of weeks ago, one of my top long picks for the second quarter is Schweitzer-Mauduit International (SWM - commentary -Trade Now). I've been a holder for several weeks now and it's done very well, but I still see more upside ahead. It's a classic example of a company being thrown out with the bathwater over unfounded concerns. Luckily for us, that needless investor panic is an opportunity, especially leading up to the company's first-quarter earnings call on Thursday morning.

Schweitzer- was spun out of Kimberly-Clark(KMB - commentary - Trade Now) in 1995, but its history as a company dates back 100 years. Its specialization has been in producing specialized nonflammable paper used in the manufacturing of cigarettes. This specialty has been so unique that Schweitzer's products are used by all the large cigarette companies around the world. The company is most famous for low ignition propensity (LIP) cigarettes. Sales totaled $740 million last year.

Where the Stock Has Been

Schweitzer has underperformed the market for most of the past decade. From the start of 2002 to the end of June 2008, Schweitzer's stock lost 27% while the S&P 500 gained 10%. Cigarette paper appeared to be a sleepy business, and some investors complained about the governance of the company. Some smaller hedge funds expressed concerns about management being too lethargic and not taking adequate steps to unlock the inherent value in the franchise, but their complaints largely fell on deaf ears.

The stock has come alive in the past year. From a low of $13 at the March 2009 lows last year, the stock ramped up to more than $80 in early January. The sharp rise was due to investors paying more attention to the company's strong and steady results and its unique competitive advantages within its space.

But the stock hit a major speed bump in February, dropping sharply. It hit a 2010 low of $42 in March before starting to rise over the past few weeks.

Why the Selloff?

On Feb. 10, the stock closed over $70. The next day, it announced fourth-quarter earnings. In the Q&A session, the company mentioned that one of its largest customers, Philip Morris USA -- a subsidiary of industry titan Altria (MO - commentary - Trade Now) -- would be exploring the possibility of developing alternative technologies or other potential suppliers (including self-developed) for the LIP cigarettes it purchases from SWM. The stock began a free fall during the earnings call and ended the next day below $50. By March 7, the stock was down to $42.

The market clearly worried that the bottom was about to fall out of Schweitzer's core product if one of its largest customers jumped ship -- and perhaps that other customers would follow suit.

As I wrote a couple of weeks ago, one of my top long picks for the second quarter is Schweitzer-Mauduit International (SWM - commentary -Trade Now). I've been a holder for several weeks now and it's done very well, but I still see more upside ahead. It's a classic example of a company being thrown out with the bathwater over unfounded concerns. Luckily for us, that needless investor panic is an opportunity, especially leading up to the company's first-quarter earnings call on Thursday morning.

Schweitzer- was spun out of Kimberly-Clark(KMB - commentary - Trade Now) in 1995, but its history as a company dates back 100 years. Its specialization has been in producing specialized nonflammable paper used in the manufacturing of cigarettes. This specialty has been so unique that Schweitzer's products are used by all the large cigarette companies around the world. The company is most famous for low ignition propensity (LIP) cigarettes. Sales totaled $740 million last year.

Where the Stock Has Been

Schweitzer has underperformed the market for most of the past decade. From the start of 2002 to the end of June 2008, Schweitzer's stock lost 27% while the S&P 500 gained 10%. Cigarette paper appeared to be a sleepy business, and some investors complained about the governance of the company. Some smaller hedge funds expressed concerns about management being too lethargic and not taking adequate steps to unlock the inherent value in the franchise, but their complaints largely fell on deaf ears.

The stock has come alive in the past year. From a low of $13 at the March 2009 lows last year, the stock ramped up to more than $80 in early January. The sharp rise was due to investors paying more attention to the company's strong and steady results and its unique competitive advantages within its space.

But the stock hit a major speed bump in February, dropping sharply. It hit a 2010 low of $42 in March before starting to rise over the past few weeks.

Why the Selloff?

On Feb. 10, the stock closed over $70. The next day, it announced fourth-quarter earnings. In the Q&A session, the company mentioned that one of its largest customers, Philip Morris USA -- a subsidiary of industry titan Altria (MO - commentary - Trade Now) -- would be exploring the possibility of developing alternative technologies or other potential suppliers (including self-developed) for the LIP cigarettes it purchases from SWM. The stock began a free fall during the earnings call and ended the next day below $50. By March 7, the stock was down to $42.

The market clearly worried that the bottom was about to fall out of Schweitzer's core product if one of its largest customers jumped ship -- and perhaps that other customers would follow suit.

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